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April 18, 2018 / 0 Comments

The Inherent Risks of Trading on Margin

The main risks that come with margin trading are these.

1.Rate risk and interest charges

Every margin account has a rather high-interest rate. Over time, the interest cost on your margin debt can add up. This occurrence can make your gains on margined securities significantly smaller, as it can erode them. Another thing that’s important to know is the fact that interest rates on margin debt aren’t fixed. These can fluctuate during the period when you (the investor) have margin debt. In this environment where the interest rate is rising, margin loan interest rates will go even higher. In the end, this will add to the interest burden for every investor that’s engaged in margin trading. That’s why you need to pay close attention to interest rates if you don’t want them to “eat” your gains.

2. Amplified losses risk

Margin trade can increase gains, but unfortunately, it can also increase losses. We’ll explain how is it can happen to lose over 100% of what you initially invested during margin trading.
So, for instance, you invest $10,000 without a margin and buy 100 stocks at $100 each. If shares fall to $50 after six months, your stocks will be worth $50 dollars each, and your share sale proceeds will be $5,000. This way, you only lose 50% of your initial investment. Not great, but you’re not in the red yet.
On the other hand, if you made a margin investment of $10,000 on those same $100 stocks, and bought 200 shares, you’ll lose a lot more. If shares fall to $50 after six months, your share sale proceeds will be $10,000, the interest on margin loan that’s 8.5% will amount to $425. In the end, you won’t just lose your entire investment. You will be in debt to your brokerage for another $425, or another 4.25%.
Even worse, if the security you bought takes a plunge and drops to zero instead of 50, the loss comes to $20,425. Your investment return would be minus two hundred and four percent. In the worst case scenario like this, you wouldn’t just lose your entire investment; you would also have to repay your $10,000 margin loan as well as the interest that’s $425.
If you owe to your broker, you need to repay it in full, as this debt binds you just like a debt to a bank or any other institution.

3. Margin call

If you bought stock on margin, and it suddenly has a sharp plunge (or if you were short selling, if that stock suddenly peaks in price), you’ll have to meet the margin call. This is the point where you’ll have two choices. Either to provide a lot of money or some marginable security at a very short notice. That’s why you need to have a backup at all times.

4. Forced selling

If you are unable to meet the margin call, your brokerage is able and it will sell those margined stocks without notifying you. If the market’s plunging, a forced liquidation like this might mean that your position will be sold at most unfavorable moment possible. This can generate a serious loss. Even worse, if those margined stocks eventually recover, all of this would’ve been for nothing. Unnecessary whipsawing.

5. Additional vigilance while monitoring an account or a portfolio

If you want to get into margin trading, it requires additional vigilance while you monitor the margin portfolio or account. This will ensure that your margin doesn’t fall under a certain level. When the market is especially volatile, doing this will be incredibly stressful.

July 2, 2017 / 0 Comments

Different Stock Market Order Types Available in the Trading Industry

Advancements in technology have contributed to the changes in the trading industry. Most investors now rely on the online trading technology while buying and selling their stocks. Increased use of online brokers in the 21st century has made stock trading faster, cheaper and easier than ever before. The stock market prices keep fluctuating every day meaning that the investors should stay up to date with the current changes in the market. Therefore, Understanding Different Stock Market Order Types is essential in increasing profits from stocks sale. Stock-Market

Different Stock Market Order Types

Some investors would prefer trading on stocks using fixed prices while others do not. The investors also dictate terms that stockbrokers should follow during the trade to ensure maximum profit. The terms and instructions given to the brokers determine the ideal order type depending on the risks the investor is ready to take. Below is a detailed explanation of the most popular orders types:

1. Market Order

The stockbroker has the liberty to execute the trade at the prevailing price in the market. It is the fastest trading method since the buyer aims at getting the lowest available price while the seller’s focus is on the highest offer. Execution of the order is easy, but the price keeps fluctuating especially in volatile markets.

2. Limit Order

The investors using this order have control over the buying and selling prices of their stocks. A stockbroker can only execute a buying limit order only if the stock falls at the limit price or below and can only fill a selling limit order only at the specified price or above. The trader has complete control over the price of the orders unlike the market orders, which depends on the current market price. Remember that any limit order cancels after 180 days.

3. Stop Order

Stop order protect an investor from losses by combining the market order and the limit order. In this order type, the investor gives the stockbroker a particular price, which activates the order. The brokers then execute it as a market order on the future trades. Investment-Decisions

4. Stop Limit Order

The orders work the same way as the stop loss orders, but they become limit orders after activation instead of market orders. The order executes if someone is willing to trade at the specified prices of better prices.

5. Buy Stop Order

It is common with investors looking to protect their profits over a particular stock that they have sold at a lower price. The price for the order is higher than the market price for the buy stop order while the sell stop order usually has a stop price below the market prices.

Bottom Line

Market orders, limit orders, and stop-loss orders are the most common ones in trading. However, investors have additional orders to choose from while getting the ideal stock-orders types. Other types of stock orders you can consider getting include basket orders, day order, trailing stops, and valid till cancelled order. An investor should also consider doing research while getting an order by looking at its time and money saving capabilities as well as the risks involved.

June 20, 2017 / 0 Comments

Stock Market Futures: Everything You Need to Know

Want to know what are stock market futures? Here is everything you need to know about them. Stock futures are trade contracts that give you the necessary power required to buy or sell stocks at the agreed fixed price by a specific date in the future. When you accept the contract, you are required to uphold all the terms of the agreement. The contracts have consistent specifications like the method of payment, tick size, price per unit quotation, expiry date and market lot. stock-market

Stock Futures math

Futures Price = (Spot Price + Carrying Charge)
The stock futures price is usually higher than the spot price. Futures price is a price for which a commodity can be sold or bought for delivery in future. The spot price is the present-day market price at which a commodity can be sold or bought for immediate delivery and payment. Carrying Charge or Cost of Carry is the storing cost of a physical commodity like metals or grains over a period of time or until the futures contract matures less all the expected dividends within the contract period. stock-market-bids
Example:
The spot Price of ABC = 2000 and Interest Rate = 8% p.a.
So, the Futures Price contract for 1 month =2000 + 2000*0.08*30/365 = 2000 + 13.15= 2013.15

Meet the Players

1. Hedgers

Hedgers can be exporters, importers, manufacturers, and farmers. The main aim is to buy and sell futures in a bid to secure future price of a commodity to be sold later in the cash market. Those holding the contract for a short time will want to get as high prices as possible while for long term holders it is vice versa. Usually, almost all the risks associated with price volatility are reduced. Hedging sometimes can be used to lock the price margins between the price of raw materials and that of the finished product.

2. Speculators

The other market players’ main aim is to benefit from the risks associated with the futures market. Speculators profit from the price changes that hedgers try to protect. When hedgers are trying to reduce risk the speculators are trying to increase it in order to maximize their bottom line. If the hedger is anticipating a future decline in prices then he or she would be selling to the speculator such a contract at a low price. Also, the speculators enter the market for the sake of profits only through selling and buying futures but not owning the commodity.

Characteristics of Stock Market Futures

Contract size – it is also referred to as a lot. What this means is that one contract can have many shares and the number of shares included is the size of the contract. When buying and selling futures, a single share is not usually traded. For example, if a contract has 300 shares, the selling and buying will involve the whole bunch.
Expiry – there are three types of maturities associated with stock futures. They include near month contracts (1 month), middle month contracts (2 months) and far month contracts (3 months). All maturities expire on their particular contract months (last Thursday of the contract month) and they are traded simultaneously. All stock futures contracts are for future transactions. So, the contract duration determines how far in the future it will be settled.
Leverage – this is having control of commodities worth more than your capital. With just a small amount of cash, you have the green light to enter into a stock futures contract worth more than what to can afford, at the moment, to pay. A small shift in prices can mean a huge loss or profit.
Pricing and limits – the stock futures market price quotations are done in the same way as in cash market, that is, per unit, cents or dollars. However, there are restrictions on the price movements for a futures contract. So, there is an upper and a lower price boundary set per day that heavily relies on the previous day closing.

Conclusion

Lastly, the profits and losses are determined by the prices between the closing price and the opening price of the futures. For example, if an investor buys “Y” futures at $530 each in November, he or she may sell the same futures at $550 each in the same month. In that case, the investor would bag a profit of $20 per future. But if he or she sells the same futures at $505, then he or she would make a $25 loss per future.
References
http://money.howstuffworks.com/personal-finance/financial-planning/stock-future.htm
http://www.bseindia.com/markets/Derivatives/DeriReports/FAQsStockFutures.aspx?expandable=5
https://www.kotaksecurities.com/ksweb/Research/Investment-Knowledge-Bank/what-are-futures-contracts
http://www.investinganswers.com/financial-dictionary/optionsderivatives/futures-1002
http://www.sharemarketschool.com/futures-understanding-the-basic-terms/
https://www.thebalance.com/what-are-futures-definition-and-examples-1031172